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  • Writer's pictureGreystone Capital

Finding an edge; creating a moat around an investment process

I wanted to share this video of a presentation I recently watched by small cap investor Brian Bares, founder of Bares Capital Management.

As I tweeted last week, this was one of the best investment lectures I’ve ever seen, full of practical advice surrounding how to truly create an edge with an investment process, where market-beating returns come from, and what sort of behavioral characteristics are needed to be a successful active manager.

It’s no surprise that Brian has had plenty of success in the industry, after starting his firm around 2000 with $21,000 of his own money, and a small office in Austin, Texas.

Some of my notes from the presentation are below, and the video is posted at the bottom. I highly recommend taking 90 minutes to listen and absorb the information.


  1. No real barriers to entry in the investment business other than:

  2. Youth and inexperience

  3. Style boxes

  4. Lack of a track record

  5. Chicken and egg problem – getting assets

  6. Brian explains it’s much easier to go from say $2 billion to $6 billion than it is to go from $0 to $1 million

  7. Bares Capital strategy for small cap was to go after institutional clients, not HNW

  8. Differentiation includes:

  9. a sustainable edge that produces good results

  10. concentrated and qualitative – 10 stock portfolios

  11. Concentration is hard. Why is it hard?

  12. It’s really embarrassing when it doesn’t work

  13. Hard choices, easy life; easy choices, hard life

  14. Bares Capital wanted to do the things that most manager won’t/can’t do – concentrated, deep research, feet on the ground due diligence

  15. A rocky path can lead to outperformance over time – because one is doing things that other’s don’t do

  16. Plenty of incentives to diversify – but they are trying to outperform, not look like an index

  17. How to build something totally differentiated

  18. Start by thinking about how to build something undifferentiated (invert)

  19. Screen on high ROE

  20. Identify Buffett characteristics

  21. Rely on industry standard tools – Bloomberg, TV, fees – plenty of managers lack confidence in their investments, so they look to others to confirm (i.e. – can I talk to you about this company you own, that I also own?)

  22. Stock prices follow per share business value growth

  23. Exceptional share price performance comes from exceptional compounding

  24. Exceptional intrinsic value compounding

  25. Moats

  26. Management

  27. Growth that is underappreciated by the market

  28. How can a company potentially grow in a way that other market participants aren’t focused?

  29. Bares Capital investment process moat

  30. Team – 15 people on the phone, and in the car

  31. Focus on three things exclusively (moats, management, underappreciated growth)

  32. Have the discipline to structure our strategies so they can’t be replicated

  33. For example: Goldman can’t start a concentrated 10 stock portfolio in small caps – doesn’t generate enough fees

  34. Important to remember that moat does NOT mean edge

  35. A moat is hard to replicate, but just because it’s hard to replicate doesn’t mean it’s any good!

  36. The edge is producing the variant perception which leads to the outperformance

  37. What is an investment edge?

  38. A repeatable sourcing of variant perception that leads to sustained outperformance

  39. Variant perception

  40. Informational edge

  41. Processing the information differently

  42. Two parts to an investment edge

  43. Build something that’s hard to replicate

  44. Create sources of variant perception that lead to outperformance

  45. Everything in the investment management business revolves around sales

  46. Selling yourself, selling to your colleagues, selling an idea or a stock

  47. Raising money requires talking to people who want to give it to you

  48. Difference between someone with high AUM and low AUM is their ability to sell and their dislike or like of the sales process

  49. If you’re a high teens compounder, you need the other part of the skillset which is selling ability

  50. Need entrepreneurial drive to make this work

  51. You have to live or die by your own sword – assume it’s going to work. Coming across as insecure means you won’t get any money. I’m going to go from here to there, and either you’re coming with me or you aren’t

  52. Meeting with management teams

  53. Understand what they’re working on and why they’re working on it

  54. Have a list of questions

  55. Understand things you can’t get from the proxy or 10K filings

  56. Don’t waste anyone’s time

  57. Try to see things in action, if there are things to see – culture, machinery, competitive advantages etc.

  58. Due diligence depends on how much there is to see

  59. Sometimes takes years, others times a buy can be made after a few months

  60. Maybe not as much to see with non-technical businesses

  61. If there is a process or something that requires signing an NDA after, you probably want to see that

  62. Work really hard to be dispassionate about your purchase price

  63. If the competitive story changes, you have to sell

  64. Do what’s rational and dispassionate when it comes to the portfolio



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